Month: December 2016

Want to Save for Retirement Tax-Free?

If you are thinking about skipping a 2016 IRA contribution because it’s not tax deductible – Think Again! Contributing to a non-deductible traditional or Roth IRA means growth that is never taxed. The earlier you begin investing in an IRA the longer you receive the benefit of tax-free growth.

 

Three common questions about IRAs:

 

How Much Can I Contribute?

Your maximum contribution amount for 2016 is $5,500 and an additional $1,000 for ages 50 or above. The contribution amount is based on filing status and modified adjusted gross income. For example, in 2016 a single taxpayer can make the maximum contribution up to a modified adjusted gross income amount of $117,000. Contributions are reduced the higher the income. In addition, don’t forget about checking with your employer to see if you can contribute any more into your employer- sponsored §401(k) plan, §403(b) plan or §457(b) plan before the year ends.

 

Can I Convert a Traditional IRA to a Roth?

If your income decreases and you fall into a lower bracket you could consider “converting” nondeductible traditional IRA funds into a Roth IRA and pay less tax in the year of conversion. You could pay less tax on the growth or perhaps no tax if your income has really dipped in a particular year or years. The conversion can be done in pieces and is not an all or nothing approach.

 

What About Distributions?

When you do start taking distributions on your IRA after age 59½, only some of it will be taxed and some will be a tax-free return of your investment. Distributions taken before age 59½ are subject to a 10% early withdrawal penalty.

 

These plans allow tax deferral and permit tax savings in the current year with the growth deferred into another period when distributions are received. For issues and questions dealing with a Roth IRA, nondeductible IRA and employer sponsored plans, contact me for more details.

Are Those Year-end Donations Deductible?

This late in the year, you might think it’s too late to lower your 2016 tax bill. Maybe not!

 

Lower your taxes and warm your heart at the same time by making charitable contributions before year-end. Taxpayers may be able to deduct contributions to qualified charities. How do you know that a charity is qualified and your donation is deductible?

 

Answers to three common questions determine whether a donation is tax deductible:

 

Is the Charity Qualified?

 

Only donations to qualified charities with an IRS exemption designation are tax deductible. Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. A list of qualified charities is posted in the IRS’ “Exempt Organizations Select Check” tool at http://bit.ly/1g0xhkc.

 

Who Can Take a Deduction?

 

Charitable donations are only deductible for taxpayers who itemize their deductions using IRS Schedule A. Donations must be acknowledged in writing by the charity. Donations of $250 or more must be supported by a letter from the charity stating the date and amount of the donation, reduced by the value of anything in received by the donor in return, such as a fundraising dinner.

 

What about Non-Cash Donations?

 

Donations don’t have to be financial. Items such as clothing, household goods, vehicles, stock, or real estate, can also be donated. In general, clothing and household items can only be deducted if they are in good usable condition. The deduction per items is based on the “thrift shop” value. Donated vehicles valued at more than $500 and donated property valued at over $5,000 are subject to more rules and limits.

 

Space limits the information presented here. Need more details? Consult a qualified tax professional or check out IRS Publication 526, Charitable Contributions, at http://bit.ly/1ep31yt.

 

Health Savings Accounts

Did you know that you can fund medical expenses and save taxes at the same time? Tax rules include multiple programs providing tax advantages to offset qualified medical expenses. One of the most common and easy-to-implement programs is a Health Savings Account (HSA).

 

HSA contributions can be made by an eligible individual or any other person, including an employer or a family member. No permission or authorization from the IRS is necessary to establish an HSA with a qualified trustee, such as a bank or an insurance company.

 

What are the benefits of a HSA?

 

  1. Tax Deduction

You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on IRS Form 1040. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

 

  1. Tax Free Rollovers to Next Year

The contributions remain in your account until you use them. The interest earnings on account assets are tax free.

 

  1. Tax Free Distributions

Distributions may be tax free if used for qualified medical expenses. Qualified medical expenses are expenses that would generally qualify for the medical and dental expenses deduction. Expenses incurred before you establish your HSA are not qualified medical expenses. State law determines when an HSA is established.

 

Who is eligible for a HSA?

 

Individuals eligible to qualify for an HSA must meet certain requirements, which can get pretty complicated. In general, eligible individuals must:

 

  • Be covered under a high deductible health plan (HDHP).
  • Have no other health coverage.
  • Not enrolled in Medicare.
  • Cannot be claimed as a dependent on another taxpayer’s tax return.

 

Need more details? The IRS has them for you at http://bit.ly/1im7iei.